Yesterday, in “Behind State Farm’s Claims Curtain: Who Is Really Managing Your Insurance Claim?”, I introduced readers to internal State Farm documents made public in an Oklahoma bad faith lawsuit. I promised we would look more closely at what those documents reveal about the management of claims adjusters and the corporate goals established for the claims process. After studying the exhibits, I am even more convinced that every public adjuster, insurance company adjuster, restoration contractor, and policyholder in a dispute with their own insurer should spend some time reading them. The documents provide a fascinating look at how claims decisions are monitored and how management measures success. For me, I was often thinking, “When an insurance company measures the performance of its claims department, what does it consider a good result?”
Exhibit 1 is a June 2021 State Farm report titled “P&C Claims Fire Claim Quality.” The report describes a remarkably detailed management process for reviewing claims performance. It states that measurement and monitoring occur at both the team and individual levels, with results reviewed monthly and documented through a system called MyBlock. The report describes reinspection results, management discussions, performance reviews, training initiatives, and accountability at multiple levels of the claims organization. This is not an occasional supervisor checking an adjuster’s estimate. It is an organized system of continuing oversight that reaches from senior management down to individual claims handlers.
One portion of the report caught my attention immediately. Under the heading “Other quality indicators trending positively,” State Farm reported that the ratio of total roof replacements to partial roof replacements had declined from 4.1 in June 2020 to 2.3 in May 2021. It also reported that wind and hail estimates in payment bands exceeding $10,000 had decreased 13 percent year over year. The report further identified increasing ratios of claims closed without payment to reported claims in its wind and hail categories. These are interesting measurements to celebrate as positive quality indicators. Why should a decrease in full roof replacements, larger estimates, or an increase in claims closed without payment necessarily mean that claims are being handled better?
There certainly may be legitimate explanations. If State Farm had previously been paying for roof replacements when only repairs were owed, correcting that practice would be appropriate. If adjusters were making coverage mistakes, management should identify and correct them. But the opposite is equally important. If adjusters are overlooking covered damage, improperly recommending repairs instead of replacement, or failing to recognize legitimate claims, those are serious quality problems as well. A lower average claim payment is not proof of better adjusting. Neither is a higher payment. The proper measurement should be whether the policyholder received everything owed under the policy based on a thorough and fair investigation.
The report becomes even more interesting when we examine the management practices behind these measurements. It describes team manager intervention involving total roof replacements where small hail or light wind is involved. Another section identifies a requirement for team manager authority in wind scenarios below 50 miles per hour and hail scenarios involving stones smaller than one inch. The report also discusses management reviews of dashboards tracking partial and total roof replacements, along with monthly performance discussions. It even describes meetings with claims consultants to review overturned roof decisions and promote consistency. This is a great deal of attention being paid to decisions about whether an entire roof should be replaced.
Think about what this means for the adjuster who has actually inspected the property. Suppose that adjuster believes the covered damage requires a full roof replacement. Does the adjuster have the authority to make that determination independently? What happens when the manager disagrees? Does the adjuster receive recognition for identifying damage that another person missed, or does the resulting payment create an unfavorable entry in a management report? I am not suggesting these documents answer every one of those questions. I am suggesting that they demonstrate why those questions need to be asked. Management oversight can improve claims handling, but it can also create pressures that interfere with independent professional judgment.
The second exhibit, a September 2020 executive presentation concerning State Farm’s proposed operating model, takes us even further into the corporate management process. This document, marked as a draft for discussion, describes an ambitious transformation of claims handling through automation, predictive analytics, virtual inspections, preferred vendors, and earlier claim decisions. Its stated operating objectives included making more than 80 percent of coverage decisions at initial triage, handling 35 to 40 percent of claims without human intervention, conducting 40 percent of damage evaluations virtually, and directing 95 percent of repairs through virtual or preferred-vendor options. These were proposed objectives for the broader property and casualty claims operation, not proof that each target was implemented or achieved.
I am a strong believer in technology and improving efficiency. There is nothing wrong with using artificial intelligence, digital photographs, or sophisticated data analysis to help adjusters make better decisions. But technology should assist a professional’s judgment rather than dictate the result. A photograph may show damage, but it may not reveal everything that a competent physical inspection would uncover. A predictive model may suggest that a roof is repairable, but it cannot change the actual physical condition of that roof or the requirements of the insurance policy. A spreadsheet is not a substitute for climbing onto a roof and understanding what happened.
One provision in the proposed operating model deserves special attention. It contemplates leadership review when a claim decision falls outside the range recommended by a model or deviates from an anticipated claim path. Another section refers to “outcome-based claim handling.” I would like to know much more about what those anticipated outcomes were, how they were established, and what happened when an experienced adjuster reached a different conclusion. A management review of an unusual claim can be an excellent safeguard against error. But when the system consistently questions decisions that produce larger payments, the potential for improper pressure becomes obvious. We need to know whether the same scrutiny is applied when a model recommends too little.
The presentation also identifies projected expense and efficiency improvements of $218 million to $300 million in its first phase and $325 million to $500 million in a subsequent phase. Those figures are expressly described as expense and efficiency aspirations. They should not be misrepresented as proven reductions in indemnity payments to policyholders. Nevertheless, when an insurer is pursuing enormous operational savings while simultaneously monitoring roof replacement ratios, large estimates, and claims closed without payment, the relationship between those management objectives deserves examination. The plaintiffs in the Oklahoma litigation contend that the documents support their allegations of improper efforts to reduce claim payments. State Farm disputes the allegations, and the release of these documents is not a judicial finding of bad faith.
What I find particularly troubling is the potential effect of this management structure on honest insurance company adjusters. I have spent much of my career working with and sometimes litigating against claims adjusters and managers who genuinely want to do the right thing. Most do not enter the adjustment community hoping to deny legitimate claims. They want to investigate losses, apply the policy, and reach accurate conclusions. Yet even a well-intentioned adjuster can find professional judgment challenged by management expectations, performance measurements, and systems designed around anticipated outcomes. The more intensely management measures particular financial results, the more important it becomes to ensure that adjusters are not rewarded or penalized merely because a claim costs more or less than expected.
There is a practical lesson here for public adjusters, policyholders, and restoration contractors. When a disputed claim involves a repair-versus-replacement decision, we should be interested in more than the estimate and the name of the person who prepared it. Was the decision reviewed or changed by a manager? Did an automated system recommend a particular outcome? Were special approval requirements triggered by reported wind speeds or hail size? What instructions governed the decision, and what claim-specific evidence supported it? Those questions may reveal whether the final adjustment reflects an independent evaluation of the actual loss or a decision influenced by broader management practices.
There is also a lesson for insurance company executives. State Farm’s operating model expressly includes “Pay What We Owe” as a strategic goal. That is precisely the right objective. But I would like to see the same enthusiasm for measuring missed covered damage, underpayments, inadequate repairs, and legitimate supplemental payments that we see devoted to monitoring roof replacement ratios and other financial outcomes. If an adjuster discovers that a loss is substantially greater than initially estimated, shouldn’t that accurate discovery be celebrated as a quality improvement?
I encourage readers who missed yesterday’s article to review the actual filing. Exhibit 1 begins on page 8, and Exhibit 2 begins on page 11. These documents do not establish that every State Farm adjuster was pressured to underpay claims, nor that every proposed management initiative was implemented. What they do establish is that the management of claims is far more systematic, measured, and closely supervised than many policyholders probably imagine.
Ultimately, the most important question is not whether an insurance company can reduce the number of full roof replacements or increase the number of claims closed without payment. It is whether the insurer is getting those individual claim decisions right. Policyholders purchase insurance to receive the benefits promised when a covered loss occurs, not to help an executive achieve a favorable monthly claims ratio. The best claims department should be proud of paying every dollar it owes, whether that produces a larger payment, a smaller payment, or no payment at all.
A claims quality scorecard worth celebrating is one where full proper payment is made promptly.
Thought for the Day
“A bad system will beat a good person every time.”
— W. Edwards Deming, February 1993
